Overstate rather than understate your estimates.

Can you afford it?

Assessing whether you can afford to start a business takes careful consideration. The first thing you should do is analyse your own expenses.

Go through your personal spending with a fine-tooth comb. Add up your mortgage or rent, bills, food, school fees and discretionary spending.

Look for things you can cut. Add up the items you can’t to work out the least amount of money you need to sustain your lifestyle.

Running a business can be incredibly fulfilling, but the early days in particular can be a financial squeeze. Being realistic and honest with yourself from the get go will help you avoid financial disaster.

Variable costs

These are expenses that vary depending on how much, or how little, your business produces.

Common variable costs include:

raw ingredients

production materials

stock orders.

An accountant will be able to run through your projected expenses and pinpoint any others you might not have thought of.

If you’re planning to approach lenders or investors, remember they’ll likely be more comfortable supporting your business if you (or someone in your management team) can demonstrate previous business experience. If you don’t have anyone with business experience in your team, you may want to try to gain some skills and experience of your own first.

They’ll be interested in what you’re personally investing in your business idea, both in terms of money, and in time and effort.

Forecast your cash flow

Using your estimated costs, the next step is to do a cash flow forecast for your first 12 months of business. It’s typically a spreadsheet that projects your business’s income and expenses.

It’s common to operate at a loss when you first start a business. You’ll need to make sure you have enough money in reserve to sustain yourself during this period. A cash flow forecast will help predict whether you’ll need to borrow money, and if you are financially prepared to start up.